NAO calls on Whitehall to confront long-term funding of local government

The government’s fragmented approach to oversight of council finances, and the absence of a long-term funding plan are increasing risks to statutory services, according to an in-depth analysis by the National Audit Office.

The NAO has released a report on the financial sustainability of local authorities, which shows a worsening in their financial health since its last comprehensive look at the sector in 2014.

Despite improvements in central government’s monitoring of financial risks, the NAO said that there is still a lack of coordinated monitoring of the impact of funding reductions from different government departments.

It said: “The interdependent and connected nature of service delivery in local authorities is not reflected at the level of government departments.

“Individual government departments have an understanding of the service areas for which they are accountable, but not necessarily of the potential implications of pressures in other service areas locally.”

Extra money for social care announced since 2015 has relieved some of the most acute pressures on councils, the NAO found, but it said that such short-term fixes are not sustainable.

“Where these fixes come with restrictions and conditions, this poses a risk of slowly centralising decision-making,” it added.

More problems are being caused by a lack of certainty over the shape of local government finance after 2020/21, according to the NAO.

“Financial uncertainty, both short-term and long-term, creates risks for value for money as it encourages short-term decision making and undermines strategic planning,” the report concluded.

In response, Meg Hillier MP, chair of Parliament’s public accounts committee, said: “Councils need to know what their long-term future is, but instead of sorting this out, Whitehall has used a series of short-term fixes to paper over the cracks.”

The report also said that the Ministry for Housing, Communities and Local Government’s (MHCLG) approach to assessing risk in the sector could overplay the role of leadership and underplay systemic factors.

It said: “This creates the risk that authorities are held primarily responsible for the challenges they face.”

However, it added that the department does not believe that there has been an overall deterioration in local authority leadership, and does recognise that financial pressures have grown.

Responding to the report, an MHCLG spokesperson said: “Last month, Parliament approved a funding settlement which strikes a balance between relieving growing pressure on local government and ensuring hard-pressed taxpayers do not face excessive bills.

“As part of this, we delivered a real terms increase in resources over the next 2 years, more freedom and fairness, and greater certainty to plan and secure value for money.

“We are currently working with councils to undertake a review of their needs and resources. Our consultation on this closes on Monday and all responses will be considered as we look to devise a new funding system.”

What does the NAO report say

Reduction in spending powerGovernment funding for local authorities has fallen by an estimated 49.1% in real terms from 2010-11 to 2017-18, according to the report, equating to a 28.6% real-terms reduction in “spending power”, which includes government funding and tax income. Metropolitan district councils saw a median reduction in spending power of 33.9% in real terms from 2010-11 to 2017-18. Thanks to extra social care funding, over the same period, county councils’ median reduction in spending power was 22.1%.

Service spending levelsSince 2010/11, overall service spending across all local authorities fell by 19.2% in real terms. This is the result of a 3.0% fall in spending on social care and 32.6% fall in spending on other services. Social care spending now accounts for 54.4% of overall service spend in 2016-17, compared with 45.3% in 2010-11.

Increased demandAccording to the NAO, between 2010-11 to 2016-17 the number of homeless households entitled to temporary accommodation increased by 33.9%; the number of looked-after children grew by 10.9%; and the estimated number of people in need of care aged 65 and over increased by 14.3%.

Wage costsThe National Living Wage (NLW) was cited frequently by authorities interviewed by the NAO as a significant cause of higher costs. The NLW could consume a significant proportion of the income from the adult social care council tax flexibility. Several authorities said the possibility of a relaxation of the national public sector pay could increase the pressure for local government pay increases.

ReservesLocal authorities have generally been able to build up both earmarked and unallocated of reserves since 2010-11, relative to net revenue expenditure. However, for single-tier and county councils the relative rise slowed in 2015-16, and both forms of reserves started to dip in 2016-17. In that year, 66.2% of single-tier and county councils drew on their reserves to the tune of £858m. The report said: “This could indicate authorities deliberately drawing down their reserves to support specific initiatives. However, it may also indicate cases where authorities have failed to identify resources to meet known pressures when setting their budgets and instead have had to rely on reserves.”

CommercialisationBetween 2013-14 and 2016-17, external interest payments grew by 31.4% to £707 million, and trading profits grew by 15.6% to £358 million over the same period. This has meant that net reductions in service spent accounted for a lower proportion of required savings from 2014.

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